Introduction

This paper discusses the form of limitation that might be imposed on the usage of stored value cards issued by non-bank entities and explains how such limitations work using the example of the card to be issued by Creative Star.

Background

2. On 24 September, the Hong Kong Monetary Authority (HKMA) issued for Members consideration a paper setting out the proposed framework for the authorization and exemption of multi-purpose cards issued by non-bank institutions.

3. Since the issue of the paper, the HKMA has held further discussions with Creative Star and both have agreed on most of the principles underlying the proposed framework. Pursuant to the discussions, Creative Star has made a submission setting out the tentative plan for its card, including its proposed scope of usage (see Annex 1).

4. The key question which needs to be decided is the form of limitation on the usage of the card to be issued by non-bank entities such as Creative Star.

Form of limitation

5. Essentially, the limitation on the usage of the card can be imposed in two forms -

limitation on value - this can be done by limiting the value that can be loaded on the card, limiting the value of each transaction, limiting the aggregate value of transactions made for ancillary or incidental uses, or a combination of these; and

limitation on the range of usage - this can be done by limiting the range of goods and services that can be purchased by the card.

6. The HKMA and the Creative Star hold different views in this respect. Creative Star considers that the limitation on value as described in (a) above should be adequate and that there is no need to impose additional limitation on the range of usage as described in (b) above (through the criterion that the ancillary or incidental uses should have some relationship or synergy with the core use of the card as we proposed in our earlier paper).

7. The HKMA, however, considers that both forms of limitation are necessary. As we stated in our earlier paper, an important principle underlying the regulatory scheme is to maintain the stability of the payment systems (and thus of the financial system as a whole). To avoid undue encroachment on the payment system by non-bank entities, multi-purpose cards issued by such entities should not have the characteristic of "generally accepted purchasing power" which would make them more direct substitutes for paper currency or current accounts. In keeping with this principle, it is necessary that some form of limitation should be imposed on the range of usage of the card.

8. If only the limitation on value were imposed, the card issued by non-bank entities may in practice be used for the purchase of a range of goods or services which is comparable to or even wider than that of the general purpose cards issued by banks. The fact that the value on the card is limited does not detract from its nature of representing "generally accepted purchasing power". An analogy to this is the disposal card currently issued under the VisaCash scheme. That card has a maximum limit of only $200, but there is no question that it is a general purpose card, the issue of which should be confined to banks.

9. The HKMA therefore considers that it is more logical to impose both the limitations on value and on the range of usage of the cards issued by non-bank entities so that it will not represent "generally accepted purchasing power". On the latter, the HKMAs view remains that it would be appropriate to limit the range of ancillary or incidental uses to those which have a relationship or business synergy with the core uses as proposed in the earlier paper. We further consider that such limitation should be stricter in the case of cards to which an exemption would be granted under the Banking Ordinance.

10. On the type of limitation on value, the HKMA and Creative Star also have different views on whether a limitation should be imposed on the value of each transaction. Creative Star considers that the limitation on the maximum value that can be stored on the card will automatically rule out the use of the card for expensive items and that it is not necessary to put a cap on each transaction. The HKMA disagrees with this. The reason for allowing flexibility for the Creative Star card to be used for other non-core uses is mainly to provide convenience for commuters to make other "small ticket" payments e.g. for other transport related purposes or to make purchases on the station premises. As mentioned above, the card is not intended to represent "generally accepted purchasing power" that can be used to purchase goods or services of any price. It seems therefore reasonable that the amount of each transaction should be subject to a certain limit. Our initial view is that a limit of say $200 might not be unreasonable, and this will be further discussed with Creative Star. Commuters wanting to make purchases with value higher than this limit may use other payment instruments, such as cash or credit cards, for settlement.

Overseas approach

11. In formulating the proposed policy on the scope of usage of multi-purpose cards issued by non-bank entities, the HKMA has made reference to the regulatory approaches of overseas countries. So far, the HKMA is aware of two countries, Germany and the Netherlands, among those it has studied, which are formulating policies on the issue of multi-purpose cards by non-bank entities. Both countries have adopted an approach similar to that proposed by the HKMA, that is, non-bank issuers may be exempted from the full authorization requirements if the scope of usage of their cards is limited. The forms of limitation adopted by these countries are described below.

The German approach

12. The German Banking Act is currently being amended in order to introduce provisions for the regulation of multi-purpose cards. In general, all stored value cards other than single-purpose cards are subject to banking licensing and supervision requirements. However, a "limited" system, which is defined in terms of the maximum loadable amounts per card and number of cards in circulation (such parameters are yet to be developed by the German authority), may be exempted from a broad range of supervisory requirements (such as licensing, capital, solvency, and large exposures) but would still be subject to regular reporting, audits and inspection requirements.

13. The German authority has taken the view that the crucial factor in determining whether a system is limited is not the number of purposes for which the card may be used but the number of cards distributed and the amount of value that could be stored on the card so that when these factors are taken together, the system would not reach such dimensions as to pose a danger to the integrity of the payment system* .

14. Under this approach, the German authority considers that the stored value card to be jointly issued by Deutsche Telecom, Deutsche Bahn (developed by German Railways) and other transport operators would reach such dimension that they would not fall under the exemption of a "limited" system but would need to obtain a full banking licence.

The Netherlands approach

15. The current policy inclination of the Netherlands is that schemes which have less than 100,000 cards in circulation and where the maximum value that could be stored on each card is no more than US$30 may be exempted from the full banking regulations. These schemes would however be subject to annual review by external accountants in respect of the management of funds.

16. It is also understood that under the current regulatory approach, the joint venture set up by the Dutch Telecom and a commercial bank to issue a multi-purpose card for payment of public transport, parking, telephone, would be required to obtain full banking authorization.

17. The numeric criteria adopted by both the German and Dutch authorities, e.g. imposing a limitation on the number of cards in circulation under a "limited scheme", are indeed more restrictive than our proposals. If that same approach were used, Creative Star would need to obtain full banking authorization for issue of its card.

18. We do not, however, intend to adopt that approach. We have stated in our earlier paper that it is important to strike a balance between the need to maintain the stability of the payment system and the need to avoid stifling innovations and to allow flexibility for service providers to improve the efficiency of their services to the public. We believe that our proposed criteria of applying both criteria of limitation on value and on the range of usage would strike a right balance in this respect.

Application of the proposed framework on the Creative Star proposal

19. Our discussions with Creative Star are currently focused mainly on the criteria that would be used to exempt its cards from the full provisions of the Banking Ordinance. Creative Star has suggested that one possible way forward would be for Creative Star to apply for exemption of its multi-purpose card for the following uses -

for the payment of fares for MTR, KCR (including LRT), KMB, Citybus, and HYF and also for photo booths at MTR stations;

for the payment of fares or fees for other transport or transport related applications including parking and road tolls; and

for non-transport businesses operated on transport operators premises which are high volume low transaction value in nature.

20. Creative Star agrees that any further use of the card would be subject to the approval of the HKMA.

21, As set out above, it is proposed that limitation both on value and on the range of usage will be imposed on the Creative Star scheme. On the limitation on value, the maximum value that can be stored on the card is tentatively limited to HK$1,000 (which would be adjusted from time to time to take account of inflation). Also, the ancillary or incidental uses cannot exceed the core use in terms of the aggregate value of transactions. A maximum limit may also be set on the amount of each transaction, and subject to further discussion with Creative Star, a limit of say $200 may not be unreasonable.

22. On the limitation on the range of usage, the ancillary or incidental uses should have some relationship or synergy with the core use of the card. In this regard, the current view of the HKMA on the proposed usages of the Creative Star Card at the early stage of its development (see paragraph 19 above) is that -

the payment of transport services operated by shareholders of Creative Star clearly falls within the core use of the card;

there appears to be a business synergy in extending the usage of the card for payment of fares of other transport operators and payment of parking meters, public carparks and road tolls, as these extended usages are all transport-related;

there appears to be a business synergy in extending the usage of the card for payment of goods/services provided by non-transport business on transport operators premises as this would provide convenient shopping for passengers when using these transport services. However, this will be subject to further discussion with Creative Star on the exact definition and boundary of "transport operators premises" and on the number and type of outlets at which the card would be used on such premises; and

Creative Star will need to seek further approval of the HKMA to include other future uses in its card. In doing so, Creative Star will need to present a business case for such uses and satisfy the "business relationship or synergy" criterion. It may also, as noted above, need to apply for authorization under the Ordinance.

23. Assuming that agreement can be reached with Creative Star on the range of use of its card, exemption would of course also be subject to the HKMA being satisfied about such issues as the financial support available to Creative Star itself, the security aspects of the card and the risk management and general mode of operation of the scheme as a whole (including the manner in which the float will be invested). We would also need to agree on the reporting arrangements on the operation of the scheme, including the number of cards issued and the outstanding amount of stored value.

Conclusion

24. The HKMA believes that the proposed approach as set out above, i.e. imposing limitations both on value and on the range of usage, is consistent with the principle that the payment system should be confined only to banks but some flexibility should be given for non-banks to issue multi-purpose cards so as not to stifle innovations. This proposed approach and the exemption policy will be reviewed from time to time in light of prevailing circumstances.

25. The HKMA would welcome the views of Committee Members.

Hong Kong Monetary Authority
November 1996

* -- This approach does not seem to be wholly consistent with the European Monetary Institute's 1994 report on stored value cards which did draw a distinction between multi-purpose and limited purpose cards.